Will Apple Discontinue the iPod?

By Ashraf Eassa

It's hard to believe that Apple launched the iPod all the way back in 2001. Building on the success of this product, Apple went on to become the world's most powerful consumer electronics company with the subsequent successes of the iPhone and iPad product lines. But the venerable iPod that brought so much good fortune to Apple is looking terminal as a business, and it's unclear whether this product category has much of a longer-term future.

The numbers don't lieBelow is a table of iPod sales over the last eight quarters:

iPod Sales

Q2'14

Q1'14

Q4'13

Q3'13

Q2'13

Q1'13

Q4'12

Q3'12

Units (millions)

2.761

6.049

3.498

4.569

5.633

12.679

5.344

7.67

Revenue (millions)

$461

$973

$573

$733

$962

$2143

$820

$1.207

Apple's iPod revenue and unit shipment data. Source: Apple

As you can see, the iPod segment has been in freefall over the last couple of years. Units have been cut in half in going from Q2 2013 to Q2 2014 with revenues tracking right along with them. While a part of this is surely attributable to the fact that the iPod Touch (likely Apple's leading iPod product) hasn't been refreshed since October of 2012, the harsh reality is that the iPod is being cannibalized by the iPhone to a pretty severe degree. There is no reason to own an iPod Touch if you own an iPhone, and smartphone penetration continues to grow.

iPod sales will probably keep getting worseEven at a roughly $500 million/quarter run rate, the iPod represents a $2 billion business for Apple. Further, the incremental R&D required to actually bring this product to market is probably minimal. But the problem here is that expecting even that kind of run rate longer term is probably unrealistic given the continued penetration of the iPhone and, indeed, smartphones in general.

Apple's iPod Touch hasn't been updated in nearly two years. Source: Apple

While some may truly prefer iOS and Apple products and will gladly pay the $229 or above for essentially an iPhone-sized Wi-Fi-only tablet, the value proposition really just isn't there. When you can buy a Moto G for $179 without a contract and get a much faster device that can eventually be connected to a cellular network, it becomes really tough to justify an iPod unless you have a giant iTunes collection. But how many customers have that but don't have a smartphone plan? It's not zero but it's trending to trivial.

Will Apple discontinue the iPod?The question, then, is whether Apple will just eventually discontinue the iPod in its current form. As long as the product category is profitable for Apple, it will likely continue to sell the current lineup, maybe updating the flagship iPod Touch models with more advanced silicon. But these upgrades will be few and far between as it simply makes more sense to milk existing products for all they're worth.

That said, it is likely that the iPod Touch has about 3-5 years to live before sales are more or less a rounding error for Apple and at that point it will probably be discontinued. The continued rise of fast, low-cost Android smartphones will continue to erode the already shoddy value proposition of the iPod Touch for cost-conscious consumers, and those not sensitive to price probably own iPhones. The demise of the iPod doesn't seem like an "if" but a "when," but given that the iPod's death is at least partially at the hands of the much more profitable iPhone, Apple probably doesn't mind too much.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. The Motley Fool has a disclosure policy.

Some bonus investing advice for 2014
The Economist
compares this disruptive invention to the steam engine and the printing press.
Business Insider
says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's
shocking video presentation
today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks.
Click here
to watch now!

One bleeding-edge technology is about to put the World-Wide-Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism... The Economist is calling it "transformative"... But you’ll probably just call it "how I made my millions."

Big money is already on the move. Don't be too late to the party—enter your email address below for the 1 stock to own when the web goes dark.

Leaked: Apple's next smart device (warning, it may shock you)

Apple recently recruited a secret-development Dream Team to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out...and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors.

To be one of them, and see Apple's newest smart gizmo, just click the link below!